It’s that time of the year again when your kids are excited about going to a new class with a new set of books and a new syllabus. Every new academic session, however, also brings with it higher tuition fees.
As parents, if you are oblivious to the inflation in education cost and do not have enough savings, your dreams of sending your kids to a good university for higher studies may remain unfulfilled. For example, if a university course costs Rs 3 lakh now, it will cost nearly Rs 9.5 lakh after 12 years.
As parents, if you are oblivious to the inflation in education cost and do not have enough savings, your dreams of sending your kids to a good university for higher studies may remain unfulfilled. For example, if a university course costs Rs 3 lakh now, it will cost nearly Rs 9.5 lakh after 12 years.
Parents should no longer postpone the planning for their children’s higher education till they pass out of schools. You should start saving early so that your investments get enough time to grow to be able to meet future liabilities. The earlier you start saving for your children’s future education, the less you need to save each month.
Parents need to spend more once their children start their higher secondary education. A student passes Class X at the age of 15. So, you have 15 years since the time your child is born to save for his/her education. Now, given the time horizon, the second important question is what the instruments one should invest in are.
Product spread
Recently, a number of life insurance companies as well as mutual fund houses have come out with children’s education plans. Let us first examine these products on offer.
When it comes to children’s education plans, life insurance companies are more aggressive than mutual funds in their product offerings. Life insurance companies offer children’s education plans in traditional as well as unit-linked (Ulip) platforms.
The traditional plans are money-back schemes that offer annual payouts at specified periods of time during the policy term. These payouts are guaranteed.
Every insurer has on its respective website a premium calculator corresponding to different products illustrating the benefits a policyholder will get during the term of a policy. So, you can compare the costs and benefits of different traditional plans for children’s education of various life insurers.
However, there are better options that give a guaranteed return as well as tax benefits similar to a traditional life insurance plan.
Think of the ubiquitous Public Provident Fund. It gives a guaranteed return of 8 per cent per annum which is fully tax-exempt.
Let us compare the return from a PPF account with that of a traditional education plan from a life insurance company. For this, we will consider the Young Scholar Secure plan of Aviva Life Insurance Company.
The premium calculator and the benefit illustration of the insurance plan shows if you are 30-years-old and have a new born baby, by buying this plan you can get a life cover of Rs 14,03,500 for an annual premium payment of Rs 50,515. You will have to pay the premium for 13 years. When you kid becomes 13, he/she will get an annual payout of Rs 20,000 for five years. On attaining the age of 18, the child will get a lump sum Rs 1 lakh and a guaranteed maturity amount of Rs 12,03,500 at the age of 21.
Now, consider investment in a PPF account. An annual investment of Rs 45,000 in a PPF will give you a maturity amount of Rs 13,19,593 after 15 years when your kid is about to join Class XI. You may ask why we suggested an investment of Rs 45,000 every year instead of Rs 50,515 in PPF?
With an annual premium of Rs 5,530 you can buy a term life insurance of Rs 35 lakh for 20 years that will give you a 2.5 times higher life cover than you get in Aviva Young Scholar Secure.
With this combo investment plan you can ensure that if anything happens to you anytime before your kid turns 20, your family as well as your kid’s higher education are well protected.
After using Rs 19,593 for tuition fee, if you keep the remaining PPF proceed of Rs 13 lakh in a fixed deposit account earning a 6 per cent annual interest for 5 years, you will still get an annual interest income of Rs 78,000. So, under this combo investment plan, your payouts will be Rs 19,593 in the 15th year and Rs 78,000 each year for the next five years and at the end of the 21st year you get the principal deposit of Rs 13 lakh back.
This way you can earn Rs 5 lakh more in terms of survival payouts than buying the Aviva plan.
Emergency situation
Now what happens if you die within these 21 years. Under the Aviva plan, your nominee will get Rs 14,03,500 (the sum assured) in addition to all payouts already made if you die any time between the 12th and 21st year. Unpaid premium if any will be waived off.
However, if you die in the first year of the policy, your nominee will get a lump sum payment of Rs 20,03,500 immediately and the annual payouts at specified intervals. The unpaid premium will also be waived off. The death benefit, however, will decline by Rs 50,000 with every year.
In the combo investment plan, your nominee will get Rs 35 lakh on your death during the policy term — Rs 15 lakh more than the maximum death benefit payable under the Aviva plan.
The return on this Rs 15 lakh when invested in a fixed deposit earning an annual interest of 6 per cent can take care of the annual PPF subscription amount and your family can still have Rs 40,000 annual interest income from the fixed deposit.
This shows that there are better investment opportunities in the assured return space than traditional insurance plans for children’s education. Guaranteed NAV products of insurance companies are also not better products compared with a PPF-term life combo plan.
In fact, assured income products are also not advisable if you are planning a long-term investment.
The greatest risk to a long-term investment is inflation and not capital loss. So, if you choose a fixed income asset for long-term investment, you carry a higher risk of inflation eating into your return. You can gain more by investing in equities than in fixed income instruments.
When it comes to equity investment, the two popular avenues are Ulips of life insurance companies and equity mutual funds. After the September regulations on Ulips, these products have become more attractive and at times better than equity mutual funds.
When it comes to your child’s future, there is no room for hasty decisions. Measure the pros and cons while selecting a plan as it can go a long way in deciding your child’s life.
